The wave of claims pushing through external dispute resolution (EDR) schemes has pushed professional indemnity insurance providers out of the market while legacy issues will continue to put pressure on premiums for the next two to three years.
Marsh Financial Institutions and Professional Services manager for NSW Craig Claughton said the actions of EDRs in the past few years have had an impact on the types and levels of claims being seen by professional indemnity insurers.
He also said insurers were confused by the outcomes of EDRs, which appeared to be claimant-centric in many instances – a concern raised by the Association of Financial Advisers in October last year in its submission to the review of the Financial Ombudsman Service.
“There is concern they are not getting a fair hearing, and while the point of EDRs was to get a resolution without resorting to the courts, the fact that they are not subject to the same processes raises questions,” Claughton said.
According to Claughton, the claims and costs coming out of EDR-related cases are also being examined by insurers who are paying close attention to legacy problems and the likelihood they will continue. At the same time, insurers have been observing the rise of new planner and professional standards and the effect they are likely to have on adviser conduct.
“Legacy claims have pushed some insurers to the end of the road where they have chosen to renew existing business, but not take on any new adviser clients, while raising premiums to cover the ongoing costs of those legacy claims,” Claughton said.
Despite higher levels of education and greater compliance requirements for new planners, the tail of legacy problems and the higher premiums which accompany them will continue for two to three more years.
“The tail will last at least that long for many financial planning groups, because the insurers are waiting to see improved claims histories before they feel they can ease any premium pain,” Claughton said.
“Better training and licensing are one way to fix this problem, as is ensuring advisers don’t recommend investments that fall well outside the risk profile and financial plans of their clients.”
However, further premium pressure may still eventuate as governments and regulators seek to spread the liability for failed advice to individual planners.
“There has been talk about fraud cover extending from licensees down to individual advisers, which would mean insurers taking on further risks – but they don’t feel it should go that far,” he said.
“Insurers who are writing professional indemnity are compliant with the relevant regulations and are reluctant to do anything further which would risk profits in an area already under pressure. The alternative is an industry-wide indemnity fund, but that still remains politically unattractive.”
